If you already have a car loan, you might be wondering if refinancing could save you money or better suit your financial situation. Refinancing means replacing your current auto loan with a new one — often with different terms, such as a lower interest rate, a longer or shorter repayment period, or adjusted monthly payments.
So, why consider refinancing? A lower interest rate can reduce the total amount you pay over time, while extending your loan term can lower your monthly payments (though it may cost more in interest in the long run). On the other hand, shortening your term allows you to pay off your vehicle sooner and save on interest.
If your financial situation has improved since you first took out your car loan, you may qualify for better terms, which could reduce your overall costs.
Let's take a closer look at car refinancing, including what it is, how the process works, and its potential benefits.
What is Car Loan Refinancing in Canada?
Loan refinancing means using a new loan to pay off an existing one. The goal is to improve your long-term budget, the same as with any type of personal loan.
When you request refinancing, the lender will review your credit history. For car loans, they'll also consider the vehicle’s eligibility. If your refinancing is approved, the original loan is closed out, and you’ll start making payments on your new loan. ,
How Does Car Refinancing Work?
Vehicle loans are one of the most popular loan types Canadians apply for. If you’re facing financial difficulties or find your auto loan has a high interest rate, refinancing could help you secure better terms.
Getting your auto loan refinanced is fairly straightforward. It’s similar to making your initial car purchase. Chances are you already have what you need to take the leap and apply for financing on a new loan for your vehicle.
When Do You Refinance Your Car Loan?
Remember that refinancing might entail prepayment penalties and other added costs. It's crucial to run the numbers before committing to refinancing. If your goal is saving money, ensure the penalties don't overshadow potential savings.
That said, there are a few distinct reasons why refinancing can make sense, including:
When You Want to Reduce Costs
CTV Toronto reports that the price of new and used cars is increasing significantly. Such a tendency makes refinancing even more relevant.
While it's not a given, locating a lower interest rate through refinancing is possible. If you’ve improved your credit score since you took out your loan, consider negotiating a better rate with the current lender or explore dealer financing options for more favourable conditions.
When You Want to Adjust the Terms or Conditions of Your Loan
You can extend or shorten your loan term — that is, how long it lasts — by refinancing.
A longer loan term means lower monthly payments. Though enticing, an extended loan term leads to higher total interest amounts. Conversely, a shorter term helps you pay off your loan sooner and save money on interest, but it also comes with higher monthly payments, which can strain your budget.
Refinancing allows you to adjust other loan conditions as well. For example, you might remove a co-signer if you no longer need one.
When You Want to Change Lenders
If you want to change lenders, opt for refinancing. Do you want to move your car loan from a bank or another lender to a credit union? Need help determining which one to go with? We can help.
Advantages of Car Loan Refinancing
The decision to refinance your car loan might be one of the most crucial steps in improving your long-term budget arrangements. Consider the following benefits associated with refinancing:
Lower interest rates: If making loan payments has become a burden, getting a new auto loan with a better interest rate can be the solution. The lower your interest rate, the lower the overall cost of your loan (provided you stick with optimal loan terms).
Lower monthly payments: Refinancing at a lower interest rate or extending the loan term can make monthly payments more affordable.
Quicker overall loan repayment: Remember that you can lower the interest rate on your loan without extending its term. This way, you’ll maximize your interest savings and repay your loan sooner.
Extra cash on hand: Refinancing could allow you to borrow more than your current loan balance. This is known as a cash-out refinance. However, it’s worth noting that this does increase your overall loan balance and financial risk.
Disadvantages of Car Loan Refinancing
Before committing to refinancing your existing car loan, here are some potential drawbacks to consider:
Prepayment penalties: In Canada, many lenders charge penalties if you pay off your auto loan early, which may apply if you refinance your loan. Additionally, your new loan may come with application and origination fees. It’s essential to do the math to ensure that prepayment penalties don’t overshadow potential savings associated with refinancing.
More interest payments: If you choose a new car loan with a longer term, you might end up paying more interest over the lifetime of your loan. This rule can apply even if you secure a lower-rate interest agreement.
How Do You Refinance an Auto Loan in Canada?
The decision to refinance must be thought out carefully to ensure its benefits outweigh potential drawbacks. How do you know it’s the right time to refinance your vehicle?
First, analyze the conditions of your existing agreement. Pay attention to interest rates, repayment schedules, and prepayment penalties. Write these factors down to compare your current deal to other car loan refinance offers.
Second, determine what you hope to achieve by refinancing. Do you want a lower monthly payment? Or are you looking to pay off your loan faster, switch from a variable to a fixed interest rate, or tap into your home equity? Keep in mind that while lowering your monthly payment might ease your budget, it could result in paying more overall in the long run.
Next, you can start exploring your new loan options and compare them to your current one.
Remember, you can work with a new lender or stay with your existing financial institution. Either way, your refinanced car loan will pay off your current one. Then, you'll start paying off the new loan.
Documents Required for Refinancing
As highlighted above, vehicle loan refinancing works almost the same as taking out a loan for a car purchase. You likely already have what you need to apply for a new vehicle loan.
Note that the exact list of documents you’ll have to provide when getting your car loan refinanced will depend on the specific lender. To avoid undue delays and get straight to refinancing, make sure you have these commonly required documents ready:
Tax data: Gather your T4s, as lenders often ask for tax-related information.
Pay stubs: Ensure you have pay stubs from your employer for the last three months. If you’re self-employed, prepare a relevant income statement or bank statement showing consistent earnings.
Bank information: Provide a recent bank statement reflecting all relevant banking information within your account.
Personal verification documents: Bring your personal identification documents (government-issued photo ID plus one other identity verification document), proof of residence, proof of employment, and driver’s license.
Vehicle information: Prepare all vehicle-related documents, including car insurance, car registration paperwork, as well as your vehicle’s model, make, and identification number.
Current lender’s information: Gather pertinent details regarding your current loan conditions and the payoff amount for the existing car loan.
Refinance Your Car Loan Today
Navigating all of the possibilities for refinancing your vehicle loan might feel overwhelming. Unsure of where to start? Consulting a financial advisor or using online comparison tools can make the process straightforward and efficient.
Contact us to get started!
Car Loan Refinancing Steps
Refinancing involves a few steps. First, you start with determining whether this financial decision fits your circumstances. Then, you should assess the options available for refinancing your loan. Finally, you get all the required documents ready to apply for refinancing.
Still hesitant about applying? Below is a detailed description of each stage of the process.
Step 1. Check If Car Refinancing Is the Right Option for You
Though auto refinancing seems like the perfect solution for getting better interest rates and overall terms for your car loan, it’s not always the case.
It’s crucial to assess the conditions of your current contract, i.e., its interest rate, repayment plan, and negotiated prepayment fees. Use these characteristics as metrics for comparing your existing loan to other auto loan refinancing deals.
Run the numbers to make sure the interest rate and monthly payments on your refinanced loan actually help you save money, which is the main goal of refinancing.
Step 2. Justify Your Refinancing Plan
Before committing to a new arrangement, make sure you know exactly what you’re signing up for. Contact your existing lender (if you want to stick with them) or approach a new one to discuss the options for refinancing. Check out the exact refinancing penalties and compare them to the potential savings associated with new car loans.
Do all the calculations to justify your refinancing decision. Account for immediate and long-term savings to understand whether opting for a new loan to cover the existing one is worth the effort.
Step 3. Prepare the Required Documents and Apply for Car Refinancing
Preparing to refinance a vehicle starts with gathering all the documents required to submit an application. As mentioned earlier, the process resembles applying for a loan for a car purchase. So, you might already have all you need to proceed. While the exact documents you’ll have to provide depend on your lender, there are some general rules.
Make sure you have your tax data, pay stubs, bank information, and personal verification information in place. Plus, be ready to hand in all vehicle-related documents, including car insurance, car registration paperwork, as well as your vehicle’s model, make, and identification number.
What to Consider Before Refinancing
As with any financial decision, refinancing works best if it’s a well-thought-through step. The specifics of your current financial standing, the terms of the existing vs. new car loan, readiness to pay higher vs. lower monthly payments, and changes in interest rates are all factors you should consider.
Financial Situation
Your focus in preparing for refinancing should be your current financial position. Are you ready to comply with new conditions? What is the exact amount you’ll be comfortable having as your monthly payment? You should also evaluate your credit score for a car loan to clarify what interest rate you’re likely to qualify for.
New Loan Term
A loan with an extended term means you’re likely to spend more in interest over the lifetime of your loan. If your income allows for higher monthly payments, consider a shorter loan term to eliminate additional costs.
Monthly Payments
Loans with lower monthly payments typically mean you have a longer loan term. This also means paying more interest in the long run. While it might seem enticing to eliminate the immediate burden of higher monthly payments, consider the situation from a broader perspective to make the most rational decision.
Interest Rates
Most people seek refinancing to lower their existing interest rates. However, lower rates work only if you opt for a well-planned repayment schedule. If you extend your loan payment over a considerable time frame, lower interest rates are likely to make little difference to your savings strategy.
Tips for Car Loan Refinancing
A successful refinancing application requires careful preparation. While a down payment is not typically required for refinancing in Canada, demonstrating a strong credit profile and having equity in your vehicle can enhance your eligibility and improve the terms.
Remember that a good credit history is key to optimizing refinance rates. Check your credit score and provide proof of stable income to assure the lender of minimal risks.
Ready to Get Started?
Refinancing your car loan might be an ideal option for you, provided you verify that all the factors align with your financial goals. While it might be challenging to navigate the small details of refinancing, following a step-by-step procedure will guide you through the process.
When deciding whether to get your car loan refinanced, look carefully at your credit history, current financial position, and potential benefits (as well as risks) such a decision entails.
Want further advice? Contact us to discuss your refinancing questions and needs. We’re here to help!